But how can that be when he just announced a $1.5 trillion infrastructure plan? That’s easy: It’s not a plan, it’s a scam. The $1.5 trillion number is just made up; he’s only proposing federal spending of $200 billion, which is somehow supposed to magically induce a vastly bigger overall increase in infrastructure investment, mainly paid for either by state and local governments (which are not exactly rolling in cash, but whatever) or by the private sector.

And even the $200 billion is essentially fraudulent: The budget proposal announced the same day doesn’t just impose savage cuts on the poor, it includes sharp cuts for the Department of Transportation, the Department of Energy and other agencies that would be crucially involved in any real infrastructure plan. Realistically, Trump’s offer on infrastructure is this: nothing.

That’s not to say that the plan is completely vacuous. One section says that it would “authorize federal divestiture of assets that would be better managed by state, local or private entities.” Translation: We’re going to privatize whatever we can. It’s conceivable that this would be done only in cases where the private sector really would do better, and contracts would be handed out fairly, without a hint of cronyism. And if you believe that, I have a degree from Trump University you might want to buy. ...

Part of the answer is that in practice Trump always defers to Republican orthodoxy, and the modern G.O.P. hates any program that might show people that government can work and help people.

But I also suspect that Trump is afraid to try anything substantive. To do public investment successfully, you need leadership and advice from experts. And this administration doesn’t do expertise, in any field. Not only do experts have a nasty habit of telling you things you don’t want to hear, their loyalty is suspect: You never know when their professional ethics might kick in.

So the Trump administration probably couldn’t put together a real infrastructure plan even if it wanted to. And that’s why it didn’t.

Monday, January 29, 2018

This is from Thomas Piketty's blog, but it is a collective effort signed by a group of people (listed at the end of the Piketty post):

Democratising Europe begins with ECB nominations: While our eyes are glued to the interminable vicissitudes of the German Groko, a no less important story is playing out in Brussels, but has so far met with indifference. On January 22nd and February 19th, Eurogroup finance ministers will hold private meetings that will mark the beginning of a profound renewal of the European Central Bank executive board. The first big change will be the planned replacement of current Vice-President, Vitor Constancio. In the next two years, no less than 4 of the 6 members of the executive body of the ECB, Mario Draghi included, will be replaced.

All signs indicate that the future of economic, fiscal and monetary policy in eurozone countries is at stake in this series of nominations. ...

After a decade of crisis, the ECB is no longer the same institution that was drawn up by the Treaties...; it speaks on equal terms with the four other “presidents” of the Union (of the Commission, the Council, Eurogroup, and, finally, the European Parliament) when it comes to designing the political and institutional future of eurozone government, etc.

And yet, it as if the coming nominations are just another technicality. While there is in fact a rare occasion for leading parties and actors of representative politics to make their weight felt on the crucial issue of eurozone governance, everything seems set to keep nominations behind closed doors. ...

The nomination process does not have to be conducted in private. It doesn’t have to be yet another game of European musical chairs. ...

First, my views on policy. As I said when we met by videoconference, my views are increasingly out of step with the views of most people around this table. The path that you’re leading us to, Mr. Chairman, is not my preferred path forward. I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting it rest where it should lie. We are too accepting of dangerous policies from others that have been long in the making, and we should put the burden on them.

I can think, Mr. Chairman, of a tough weekend that the Europeans had, particularly your counterpart at the ECB, in the spring or summer, when we all knew that the European Central Bank, rightly or wrongly, was going to take action. But Jean-Claude Trichet did not take action until very late that Sunday night, until the fiscal authorities did their part. He thought that if on Friday night he were to say all of the things he’d be willing to do, he’d be taking the burden off the fiscal authorities. He chose to wait. I think we would be far better off waiting. If we proceed on this path, as I suspect we will, I would still encourage you to put the burden where it rightly belongs, which is on other policymakers here in Washington, and to do so in a way that is respectful of different lines of responsibility.

Sumner is understandably scratching his head, trying to figure out what Warsh is getting at:

His reasoning process is poor and he lacks good communication skills. He has very poor judgment when interpreting data. I really don’t know what he’s trying to say here, but the reference to Trichet is interesting. Trichet was trying to encourage fiscal authorities to adopt more contractionary fiscal policies, not expansionary policies. Trichet did not want to “bail out” expansionary policies with ultra-low interest rates, and Warsh seems to be endorsing Trichet’s approach. And given Warsh’s reputation as a conservative, and the massive deficits being run by Obama back in 2010, I find it odd that Warsh would be advocating fiscal stimulus, as Brannon suggests. But again, the passage is so garbled that I could easily be wrong.

I don’t think Warsh was advocating for more fiscal stimulus at this meeting. Warsh is a Very Serious Person, and all Very Serious People know that deficits are bad. I believe that Warsh was at this juncture advocating a Trichet-style approach to the crisis, using the independence of the central bank to force the fiscal authorities to rein in those bad deficits, because of course everything wrong in the economy can be tied back to deficit spending. All Very Serious People know this. Of course, Trichet’s approach proved to be disastrous, which is why Sumner is rightfully puzzled when hearing a Fed governor suggest the same.

Sadly, Warsh was not the only Fed official who advocated such an approach. Warsh is apparently cut from the same cloth as the person I believe was the worst regional bank president in recent memory. Recall when the FOMC statement contained this sort of reference:

Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.

Of course, if you bothered to know what the FOMC was saying, you knew the complaint was that they believed monetary policy had reached its limits to stimulate the economy, and that faster growth required a more stimulative monetary policy.

Then Dallas Federal Reserve President Richard Fisher either didn’t understand what the FOMC said, or deliberately misinterpreted the FOMC. In a 2013 speech, Fisher says:

Even if we at the Dallas Fed are right and the overall outlook for the economy is better than the current dashboard or the conventional prognostications of economists, there exists a formidable brake on growth. It was referred to point-blank in the last statement issued by the FOMC: “…fiscal policy is restraining economic growth.”

Fiscal policy is inhibiting the transmission of monetary policy into robust job creation…

…The propensity of members of Congress has been to spend in excess of revenues to give pleasure to their constituents and garner their affection…Until the Congress and the president provide a clear road map as to how fiscal rectitude will be implemented, this lack of credible details for limiting the debt-to-GDP ratio and reengineering fiscal policy to stimulate rather than constrain growth is creating undue uncertainty about future tax rates, future government purchases, future retiree benefits and all manner of factors that impact employment and economic growth. Meanwhile, the divisive nature and petty posturing of those who must determine the fiscal path of the nation is further undermining confidence and limiting the effectiveness of monetary policy…

…I argue that the Fed has no hope of moving the economy to full employment unless our fiscal authorities get their act together…Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for a massive shipboard fire of eventual inflation.

These aren’t the kind of people you want in charge of monetary policy. We need policymakers that understand their role is not to withhold monetary stimulus to force fiscal authorities to pursue countercyclical policy simply because Very Serious People know that deficit spending is always bad and cutting deficits is the solution to every problem. Monetary policy is about independently assessing the economy and enacting the policy necessary to maintain full employment and price stability. And oftentimes that means taking fiscal policy as an exogenous factor.

What is particularly discouraging is that neither Warsh nor Fisher appears to understand that during a recession, at a minimum automatic stabilizers themselves will swell the deficit. Taking aim at the deficit in such times is naive at best, deliberately spiteful at worst.

My concern remains that a Fed with someone like Kevin Warsh at the helm would prove to be disastrous for Wall Street and Main Street alike when the next recession hits. Neither group needs a central banker that believes a recession is an opportunity to inflict more pain.

Wednesday, July 12, 2017

Why recessions followed by austerity can have a persistent impact: Economics students are taught from an early age that in the short run aggregate demand matters, but in the long run output is determined from the supply side. A better way of putting it is that supply adjusts to demand in the short run, but demand adjusts to supply in the long run. A key part of that conceptualisation is that long run supply is independent of short run movements in demand (booms or recessions). It is a simple conceptualisation that has been extremely useful in the past. Just look at the UK data shown in this post: despite oil crises, monetarism and the ERM recessions, UK output per capita appeared to come back to an underlying 2.25% trend after WWII.

Except not any more: we are currently more than 15% below that trend and since Brexit that gap is growing larger every quarter. Across most advanced countries, it appears that the global financial crisis (GFC) has changed the trend in underlying growth. You will find plenty of stories and papers that try to explain this as a downturn in the growth of supply caused by slower technical progress that both predated the GFC and that is independent of the recession caused by it.

In a previous post I looked at recent empirical evidence that told a different story: that the recession that followed the GFC appears to be having a permanent impact on output. You can tell this story in two ways. The first is that, on this occasion for some reason, supply had adjusted to lower demand. The second is that we are still in a situation where demand is below supply. ... [explains] ...

All this shows that there is no absence of ideas about how a great recession and a slow recovery could have lasting effects. If there is a problem, it is more that the simple conceptualisation that I talked about at the beginning of this post has too great a grip on the way many people think. If any of the mechanisms I have talked about are important, then it means that the folly of austerity has had an impact that could last for at least a decade rather than just a few years.

Tuesday, February 07, 2017

Do consumers respond in the same way to good and bad income surprises?: If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size ...

The asymmetry that we document could have important implications for the way that households respond to changes in their income that are brought about by monetary and fiscal policies. For example, changes in monetary policy redistribute income between borrowers and savers (Cloyne, Ferreira & Surico (2016)). Borrowers reported higher MPCs than savers out of both positive and negative income shocks, as is typically assumed, but the asymmetry in MPCs was clearly present for both groups. Such an asymmetry in MPCs implies that, at least in the short term, a given interest rate rise would have a larger contractionary effect on spending than the expansionary effect from an equivalent fall in rates, although households may respond differently to small changes in rates than they do to large changes in income.

Saturday, January 14, 2017

Ben Bernanke has a longish post about fiscal policy in the Caligula Trump era. It’s not the most entertaining read; perhaps because of the political fraughtness of the moment, Bernanke has reverted a bit to Fedspeak. But there’s some solid insight, a lot of it pretty much in line with what I have been saying.

Notably, Bernanke, like yours truly, argues that the fiscal-stimulus case for deficit spending has gotten much weaker, but there’s still a case for borrowing to build infrastructure...

But he gently expresses doubt that this kind of thing is actually going to happen...

Let me be less gentle: there will be no significant public investment program, for two reasons.

First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment...

But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program.

So investors betting on a big infrastructure push are almost surely deluding themselves. We may see some conspicuous privatizations, especially if they come with naming opportunities: maybe putting in new light fixtures will let him rename Hoover Dam as Trump Dam? But little or no real investment is coming.

Friday, January 13, 2017

The Fed and fiscal policy: Markets have responded strongly to Donald Trump’s election victory, pushing up equities, longer-term interest rates, and the dollar. While many factors influence asset prices, expectations of a much more expansionary fiscal policy under the new administration—higher spending, lower taxes, and larger deficits—appear to be an important driver of the recent market moves.

The Federal Reserve’s reaction to prospective fiscal policy changes has been much more cautious than that of the markets, however. Janet Yellen in December described the central bank as operating under a “cloud of uncertainty,” and the forecasts of Fed policymakers released after the December FOMC meeting showed little change in either their economic outlooks or their interest-rate projections for the next few years. How does the Fed take fiscal policy into account in its planning? What explains the large difference between the reactions of the Fed and the markets to the change in fiscal prospects since the election? I’ll discuss these questions in this post, concluding that the Fed’s cautious response to the possible fiscal shift makes sense, given what we know so far. ...

Monday, January 09, 2017

Republicans are planning to "blow up the deficit mainly by cutting taxes on the wealthy":

Deficits Matter Again, by Paul Krugman, NY Times: Not long ago prominent Republicans like Paul Ryan ... liked to warn in apocalyptic terms about the dangers of budget deficits, declaring that a Greek-style crisis was just around the corner. But ... tax cuts ... would, according to their own estimates, add $9 trillion in debt over the next decade. Hey, no problem. ...

All that posturing about the deficit was obvious flimflam, whose purpose was to hobble a Democratic president... But running big deficits is no longer harmless, let alone desirable.

The way it was: Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied... In particular, deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

This diagnosis ... was ... always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored. ...

What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.

Now, government borrowing can still be justified if it serves an important purpose..., infrastructure is still a very good idea... But while candidate Trump talked about increasing public investment, there’s no sign at all that congressional Republicans are going to make such investment a priority.

No, they’re going to blow up the deficit mainly by cutting taxes on the wealthy. And that won’t do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention. ...

But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.

Friday, December 30, 2016

A World at Risk: My last day as President of the Federal Reserve Bank of Minneapolis was on December 31, 2015. I began blogging on January 2, 2016... In my first post, I wrote that “economic policymakers can do better. Indeed, I increasingly believe that they must do better.” In my view, the global political events of 2016 show why I wrote those words.

That first post argued that macroeconomic policy remained much too tight around the developed world. It closed with the following warning and admonition:

“We are only beginning to see the impact of tight policy choices on our economies … Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.”

The process of “social fracturing and disengagement” to which I referred continued apace in 2016. In the UK, Britons voted to break away from the European Union. In the US, a political outsider used a platform of economic isolationism to defeat a string of establishment candidates from both major parties.

There will be elections in France and Germany in 2017. I expect large, and possibly decisive, repudiations of the political establishment in both votes.

Will policymakers begin to engage in the kind of fiscal/monetary easing that is needed to heal our economies and our societies? Possibly – there is talk from the incoming American administration of increases in government spending and tax cuts. But many elected officials (and professional economists) have also expressed strong opposition to these policy choices.

Those opponents should bear in mind that there are grave risks associated with overly tight macroeconomic policy and the accompanying shortfall of aggregate demand. As I wrote on January 8 of this year,

“Much of the world experienced a significant global demand shortfall throughout the 1930s … It is true that if we fast forward to 1950, the demand shortfall had been largely cured. Unfortunately, I suspect that the destruction associated with World War II was an important part of the “solution”. During the course of that War, over 50 million people were killed, and many others were injured severely. Much of the physical capital of Asia and Europe had been destroyed. The world didn’t put [its] “idle men and machines” to work - it destroyed them instead … the experience of the 1930s and 1940s is unfortunately suggestive of how the economic pressures of a global demand shortfall can give rise to highly adverse geo-political outcomes.”

Unfortunately, I see many more signs to support the possibility of “adverse geo-political outcomes” (to use my euphemism) than I did in early 2016.

So, as we enter 2017, the world needs easier fiscal and monetary policy in the form of more government debt, lower taxes (especially on investment), more infrastructure and lower interest rates. But this prescription has been the right one for at least eight years. We can only hope that we have not left the problem unattended for too long.

Tuesday, December 20, 2016

Hysteresis and Fiscal Policy, by Philipp Engler and Juha Tervala, December 19, 2016: Abstract Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy -- the consumption equivalent change in welfare for one dollar change in public spending -- is positive (negative) in the presence (absence) of hysteresis. The main benefit of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.

Saturday, December 17, 2016

Managed to get out of Eugene just ahead of the ice storm, and going to enjoy some sunshine today. So a quick post that echoes a post from Brad DeLong, and that may be it for today:

Has Academic Thinking About Countercyclical Fiscal Policy Changed?: Has academic thinking about countercyclical fiscal policy changed recently? I would not say that thinking has changed. I would say that there is a good chance that thinking is changing–that academia is swinging back to a recognition that monetary policy cannot do the stabilization policy by itself, at least not under current circumstances. But it may not be.

If things are swinging back, it is as a result of a whole bunch of extraordinary surprises.

Back in 2007 we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case. Right now we have a large number of competing diagnoses about where we were most wrong. We clearly were very wrong about the abilities of major money center banks to manage their derivatives books, or even to understand to understand what their derivatives books were. We clearly did not fully understand how those markets should be properly regulated.

Right now, however:

We have people who think the key flaw in the world economy today is an extraordinary shortage of safe assets. Nobody trusts private sector enterprises to do the risk transformation properly. Probably people will not again trust private sector enterprises for at least a generation.

We have those who think the problem is an excessive debt load where–I think we should distinguish between debt for which there is nothing safer, the debt of sovereigns that possess exorbitant privilege, and all other debts.

We have those who think we are undergoing a necessary deleveraging.

We have those who look for causes in the demography.

And then there is Larry Summers, as the third coming of British turn-of-the 20th century economist John Hobson. (The second coming was Alvin Hansen in the 1930s.) And the question: just what is Larry talking about?

Is Larry talking about the inevitable consequences of the coming of the demographic transition and of the end of Robert Gordon’s long second Industrial Revolution of extremely rapid economic growth?

Or is he talking a collapse of the ability of financial markets to do the risk transformation–to actually shrink the equity risk premium from its current absurd level down to something more normal?

If you look at asset prices now, you confront the minus two percent real return on the debt of sovereigns that possess exorbitant privilege with what Justin Lahart of the Wall Street Journal tells me is now a 5.5% real earnings yield on the U.S. stock market as a whole. That 7.5% per year equity premium is a major derangement of asset prices. It makes it very difficult for us to use our standard tools to think about what good policy would be…

Monday, December 05, 2016

The 'Carrier' of Crony Capitalism Is Evident in Trump’s Deal: When I first started teaching economics, one day a student came to my office to argue about how a multiple test question was graded. He believed his answer was correct and explained why, but I disagreed. However, the student would not give up; he kept arguing and began to get angry. Finally, to make it go away I took what seemed to be the simple route and gave him credit for the question.

That was a mistake. It turned out the student knew lots of other people in the course, and within three or four hours at least 20 students who had marked the same wrong answer showed up and demanded they be given credit as well. I had no choice but to give in. I then had to check all the answers for the 300+ students in the course to make sure everyone was treated the same, and in the end the question was essentially nullified. That was unfair to those who answered correctly. Once I made that first fateful choice to take the easy way out there was no way to be fair to everyone.

There is a lesson here regarding Trump’s announcement that he is essentially bribing Carrier with tax cuts to keep jobs in the US. ...

Discussions about increasing outlays on infrastructure frequently include claims about the positive impact these programs would have on employment and wages, often referring to the fiscal policy “multiplier.” For example, it’s often claimed that government spending on infrastructure has a multiplier between 1.5 and 2.

Does this mean we should expect a significant increase in employment and income if the government undertakes major new investment in the nation’s infrastructure? Let’s take a closer look. ...

But I am puzzled that they ... are upgrading their estimates of fiscal policy multipliers (in particular for tax cuts) at the wrong time in the business cycle, when the economy must be closer to full employment.

Here is the history: back in 2011 many advanced economies switched to contractionary fiscal policy at a time where their growth rates were low and unemployment rates remained very high. During those years the OECD seemed be ok with fiscal consolidation given the high government debt levels (consolidation was necessary). They understood that there were some negative effects on demand but as they assumed multipliers or about 0.5 (in the middle of a crisis with very high unemployment rates!) the cost did not seem that high.

Today, in an economy with unemployment rate below 5%, and wages and inflation slowly returning to normal values and a central bank ready to raise interest rate, the OECD turns around and decides to change the fiscal policy multipliers to something close to 1 even if the announced fiscal measures consists mostly of tax cuts to the wealthier households with low propensity to consume.

This is what I would call a procyclical revision of fiscal policy multipliers. Encourage consolidations in the middle of a crisis and expansion in good times. Not quite what optimal fiscal policy should look like.

And, of course, the media (including the Financial Times) reported on the OECD study as a validation of the new US administration policies.

And I leave for another (longer) post the absence of any serious discussion of the risks associated to a Trump presidency. This is coming from an organization that has been obsessed with the risks of inflation and excessive asset appreciation during the crisis.

Monday, November 21, 2016

What Size Fiscal Deficits for the United States: The US government can borrow at interest rates very close to zero. Surely the long-term benefits of public investment are greater than zero. Isn’t it obvious that the case for more government borrowing is overwhelming...?

The answer? Not so fast.

True, US government borrowing costs are very low. ...

True, if the economy were operating far below potential, the case for large deficits would then be a very strong one. Surely public investment should be increased and financed by debt under such circumstances. ...

So is it an open and shut case? No.

The US economy is operating close to its potential..., we are close to full employment. ...

This implies that if US policymakers wanted to avoid an overheating economy, greater public spending would have to be offset by a reduction in some component of private spending (which, presumably, would be achieved by an increase in interest rates by the Federal Reserve). To the extent that the reduction came from private investment..., private capital that would be crowded out. Given the poor state of public capital in the United States, the case is still there for an increase in public spending, and a corresponding higher deficit, but it is clearly weaker.

Is there a case for doing more? The answer is a qualified yes.

There is a case for temporarily overheating the US economy. The reason goes under the ugly name of “hysteresis”..., the notion that the long period of low growth and high unemployment has led to some permanent damage, which can be partly undone by a period of overheating of the economy. The most obvious case here is labor force participation... A period of very low unemployment may lead some of them to come back into the labor force. ...

What is the bottom line? There is no case ... for all-out fiscal deficits. But there is a case for a fiscal expansion, based on carefully targeted public investment. Two remarks are needed here. Maintenance of existing infrastructure..., which has been badly neglected, may be less glamorous and less politically attractive than brand-new projects, but it is where the government is likely to get the best bang for its buck. Public-private partnerships, which have been mentioned by the Trump program, may not be the right tool: By aiming at projects that can at least partly pay for themselves financially, they may generate the wrong kind of public investment. Maintenance and the most useful public projects may have high social returns, but they are likely to have low financial returns.

But remember that we’re dealing with a president-elect whose business career is one long trail of broken promises and outright scams — someone who just paid $25 million to settle fraud charge... Given that history..., you should probably assume that it’s a scam until proven otherwise.

And we already know enough about his infrastructure plan to suggest, strongly, that it’s basically fraudulent...

The ... Trump team is ... calling for huge tax credits: billions of dollars in checks written to private companies that invest in approved projects, which they would end up owning. ...

There are three questions you should immediately ask.

First, why do it this way? Why not just have the government do the spending..., the eventual burden on taxpayers will be every bit as high if not higher.

Second, how is this scheme supposed to deal with infrastructure needs that can’t be turned into profit centers? Our top priorities should include things like repairing levees and cleaning up hazardous waste; where’s the revenue stream? Maybe the government can promise to pay fees in perpetuity..., but that makes it even clearer that we’re basically engaged in a gratuitous handout to select investors.

Third, what reason do we have to believe that this scheme will generate new investment, as opposed to repackaging things that would have happened anyway? For example, many cities will have to replace their water systems in the years ahead, one way or another; if that replacement takes place under the Trump scheme rather than through ordinary government investment, we haven’t built additional infrastructure, we’ve just privatized what would have been public assets — and the people acquiring those assets will have paid just 18 cents on the dollar, with taxpayers picking up the rest of the tab.

Again, all of this is unnecessary. If you want to build infrastructure, build infrastructure. It’s hard to see any reason for a roundabout, indirect method that would ... provide both the means and the motive for large-scale corruption ... unless the inevitable corruption is a feature, not a bug. ...

Cronyism and self-dealing are going to be the central theme of this administration... And people who value their own reputations should take care to avoid any kind of association with the scams ahead.

Saturday, November 19, 2016

Infrastructure Build or Privatization Scam?: Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who you’re dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?

Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

You should immediately ask three questions about all of this.

First, why involve private investors at all? ...

One answer might be that this way you avoid incurring additional public debt. But that’s just accounting confusion. ... The government’s future cash flow is no better..., and worse if it strikes a bad deal, say because the investors have political connections.

Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money... But this ... would simply be government borrowing through the back door — with much less transparency, and hence greater opportunities for giveaways to favored interests.

Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? ... Suppose that there’s a planned tunnel, which is clearly going to be built... In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.

Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?

In many ways, it’s an appealing idea. But given the realities of American political culture, cash transfers alone cannot solve the problem. They might work, though, if combined with ... an offer of employment as trainees ... to rebuild the nation’s crumbling infrastructure. ...

Previous expansions of the nation’s infrastructure — such as the Works Progress Administration during the Great Depression and the Interstate Highway System initiative of the 1950s — have identified many useful tasks that could be done by properly supervised unskilled workers. Together, the earnings from such jobs plus the small basic income grant would exceed the poverty threshold. ...

We could provide more generous support for those most in need, while at the same time providing them with an opportunity to contribute directly to the nation’s prosperity.

Friday, October 21, 2016

Neoliberalism and austerity: I like to treat neoliberalism not as some kind of coherent political philosophy, but more as a set of interconnected ideas that have become commonplace in much of our discourse. That the private sector entrepreneur is the wealth creator, and the state typically just gets in their way. That what is good for business is good for the economy, even when it increases monopoly power or involves rent seeking. Interference in business or the market, by governments or unions, is always bad. And so on. ...

I do not think austerity could have happened on the scale that it did without this dominance of this neoliberal ethos. Mark Blyth has described austerity as the biggest bait and switch in history. It took two forms. In one the financial crisis, caused by an under regulated financial sector lending too much, led to bank bailouts that increased public sector debt. This leads to an outcry about public debt, rather than the financial sector. In the other the financial crisis causes a deep recession which - as it always does - creates a large budget deficit. Spending like drunken sailors goes the cry, we must have austerity now.

In both cases the nature of what was going on was pretty obvious to anyone who bothered to find out the facts. That so few did so, which meant that the media largely went with the austerity narrative, can be partly explained by a neoliberal ethos. Having spent years seeing the big banks lauded as wealth creating titans, it was difficult for many to comprehend that their basic business model was fundamentally flawed and required a huge implicit state subsidy. On the other hand they found it much easier to imagine that past minor indiscretions by governments were the cause of a full blown debt crisis. ...

While in this sense austerity might have been a useful distraction from the problems with neoliberalism made clear by the financial crisis, I think a more important political motive was that it appeared to enable the more rapid accomplishment of a key neoliberal goal: shrinking the state. It is no coincidence that austerity typically involved cuts in spending rather than higher taxes... In that sense too austerity goes naturally with neoliberalism. ...

An interesting question is whether the same applies to right wing governments in the UK and US that used immigration/race as a tactic for winning power. We now know for sure, with both Brexit and Trump, how destructive and dangerous that tactic can be. As even the neoliberal fantasists who voted Leave are finding out, Brexit is a major setback for neoliberalism. Not only is it directly bad for business, it involves (for both trade and migration) a large increase in bureaucratic interference in market processes. To the extent she wants to take us back to the 1950s, Theresa May’s brand of conservatism may be very different from Margaret Thatcher’s neoliberal philosophy.

Thursday, September 22, 2016

At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:

Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.

First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue.

Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year.

Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.

Thursday, August 25, 2016

Why Do We Talk About “Helicopter Money”?: Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:

Effective and successful–even in the very low interest rate world we appear to be in.

Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.

Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.

Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.

Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.

The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.

If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be. ...

[The post also includes a list of links to other discussion of this topic.]

Tuesday, August 23, 2016

Why We Need a Fiscal Policy Commission: During the Great Recession, monetary policymakers were aggressive and creative in their attempts to revive the economy. I wish they had been even more aggressive, and at times they were a bit slow to react due to excessive fear of inflation and the tendency to see recovery just around the corner, but their overall response to the crisis was commendable. Unfortunately, monetary policy alone was far from enough to give the economy the help it needed. Fiscal policy was needed too.

Monday, August 08, 2016

Time to Borrow, by Paul Krugman, NY Times: ...There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.

How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing. ...

First, we have obvious, pressing needs for public investment in many areas. ... Meanwhile, the federal government can borrow at incredibly low interest rates: 10-year, inflation-protected bonds yielded just 0.09 percent on Friday. ...

Spending more now would mean a bigger economy later, which would mean more tax revenue..., probably be larger than any rise in future interest payments. And this analysis doesn’t even take into account the potential role of public investment in job creation...

So why aren’t we borrowing and investing? Here are some of the usual objections, and why they’re wrong.

We can’t borrow because we already have too much debt. ... But ... what matters is the comparison between the cost of servicing our debt and our ability to pay. And federal interest payments are only 1.3 percent of G.D.P., low by historical standards.

The government can’t do anything right. ... But to hold that view you have to turn your back on our own history: American greatness was in large part created by government investment or private investment shaped by public support, from the Erie Canal, to the transcontinental railroads, to the Interstate Highway System. ...

But will the next president be able to act...?

The good news is that elite discourse seems, finally, to be moving in the right direction. Five years ago the Beltway crowd was fixated on debt and deficits as the great evils. Today, not so much.

The bad news is that even if Hillary Clinton wins, she may well face the same kind of scorched-earth Republican opposition President Obama faced from day one. ... Will there be a strong enough Democratic wave to give Mrs. Clinton the ability to act?

But while the politics remain uncertain, it’s clear what we should be doing. It’s time for the federal government to borrow and invest.

Thursday, August 04, 2016

If only someone had warned us: The title is pinched from a tweet by Tony Yates, who was one of many economists who did warn of the impact of Brexit. Of course we economists need to ask ourselves if and why our message was ignored, but that is no reason to stop us feeling angry that it happened. This post from the economist who did more than most to try and get the message across, John Van Reenen, expresses that anger better than I could.

What John’s work showed, backed up by similar analysis in the Treasury and elsewhere, is that Brexit would not just cause a short term economic downturn: cutting wages and increasing unemployment for just a year or two. By making it harder to trade with our immediate neighbours it will reduce UK trade overall, and the evidence suggests that this will permanently reduce people’s living standards. ...

The tricky thing to do now is know how much the current downturn is just a foretaste of that, and how much is something over and above that. To the extent that it is the latter, how much of that is offset by some short term benefit to exporters (before the impact of actual Brexit kicks in) as a result of the depreciation? That is initially the Bank of England’s problem.

Their response today, a cut of 0.25% plus more QE, tells us it is not just their problem. We are back at the lower bound for nominal interest rates, which is why the Bank is doing more QE. Because the impact of the QE is extremely uncertain, and in the absence of helicopter money, we now need fiscal action to back up this interest rate cut. ... When interest rates are at the lower bound, forget about the deficit and focus fiscal policy on avoiding a recession. As the Bank’s QE action makes clear, there is no good reason to delay this: it should happen now.

But Brexit was not the first time economists have been ignored. For some years now the clear consensus among academic economists is that, when rates are at their lower bound, you need fiscal stimulus. Although Conservatives have disowned 2015 Osborne austerity, they appear not to have backtracked on his 2010 version. If they do nothing now, we will know that they are wedded to pre-Keynesian 1930s economics.

Sunday, July 17, 2016

Helicopter money: Despite aggressive actions by central banks, many of the world’s economies are still stagnating and facing new shocks, leading to renewed calls for helicopter money as a serious policy prescription for countries like Japan and the U.K.. And, if things go badly, maybe the United States? ...

After discussing helicopter money, he concludes with:

... If helicopter money is no more than a combination of fiscal expansion and LSAP, and if we think LSAP hasn’t been able to do that much, it’s clear that the fiscal expansion part is where the real action is coming from. On the other hand, if we think both components make a difference, there’s no inherent reason that the size of the fiscal operation has to be exactly the same as the size of the monetary operation.

Nevertheless, as has been true with LSAP, there might be some psychological impact, if nothing else, from announcing this as if it were a new policy. For example, I could imagine the Fed announcing that for the next n months, it will buy all the new debt that the Treasury issues. For maximal effect this would be coupled with a Treasury announcement of a new spending operation. Doubtless the announcement would bring out calls from certain quarters that the U.S. was going the route of Zimbabwe. And just as in the previous times we heard those warnings, those pundits would be proven wrong, as indeed the effects would not be that different from what we’re already getting from central bank expansions around the globe.

Helicopter money is no bazooka for stimulating the economy. Ben Bernanke offered this reasonable summary:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances– sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies– such programs may be the best available alternative. It would be premature to rule them out.

Wednesday, July 06, 2016

A Remarkable Financial Moment: The US 10 and 30 year interest rates today reached all time low levels of 1.32 percent and 2.10 percent. Record low 10 year interest rate were also registered in Germany, France, Switzerland and Australia. Notably Swiss 50 year interest rates are now for the first time negative. Rates out 15 years are negative in Germany and 9 years in France. ...

Remarkably the market does not now expect a full Fed tightening until early 2019. This is despite all the Fed speeches expressing optimism about the economy and a desire to normalize interest rates.

I believe that these developments all reflect a growing awareness of the importance of the secular stagnation risks that I have highlighted over the last several years. ...

Unfortunately markets have been much more aggressive in responding to events than policymakers. ... Having the right world view is essential if there is to be a chance of making the right decisions. Here are the necessary adjustments.

Second, as counterintuitive as it is to central bankers who came of age when the inflation of the 1970s defined the central banking challenge, our problem today is insufficient inflation. ...

Third, in a world where interest rates over horizons of more than a generation are far lower than even pessimistic projections of growth, traditional thinking about debt sustainability needs to be discarded. ...Brad Delong and I set out in 2012 for expansionary fiscal policy to pay for itself are much more easily satisfied today than they were at that time.

Fourth, the traditional suite of structural policies to promote flexibility are not especially likely to be successful in the current environment... Indeed in the presence of chronic excess supply structural reform has the risk of spurring disinflation rather than the contributing to a necessary increase in inflation. There is in fact a case for strengthening entitlement benefits so as to promote current demand. ...

Thursday, June 23, 2016

Making automatic stabilizers more effective for the next U.S. recession: When the next recession hits, policymakers can take steps right then and there to fight the economic downturn. The Federal Reserve can lower interest rates and the legislative and executive branches can deploy fiscal stimulus by cutting taxes or boosting spending. But another way to counteract a recession relies on steps taken before economic growth begins to turn downward, relying on so called automatic stabilizers, which trigger on when the economy worsens. Think of unemployment insurance, which laid off workers collect, or the Supplemental Nutrition Assistance Program, which is eligible for workers under a certain income threshold.

These automatic programs were designed as forms of social insurance to help people weather the shock of losing a job. But they also boast the benefit of increasing consumer spending and therefore dampening the severity of a recession...

The next U.S. recession is probably not just around the corner. But it’s never too early to start preparing. If policymakers want to give themselves (or their future colleagues) a running start, they should take a look at strengthening automatic stabilizers such unemployment insurance and consider how other types of automatic-stabilizer programs might help the broader U.S. economy when it eventually takes another tumble.

The problem is "Making Congress More Effective for the Next U.S. Recession."

Wednesday, June 22, 2016

The Myth of Austerity and Growth: ...Five years ago, it was common to hear claims that too much government borrowing would hurt growth -- an idea known as expansionary austerity. Much of the research cited by the proponents of this theory was done by scholars at the International Monetary Fund. But during the past few years, there have been quite a few questions about the IMF’s past cheerleading for belt-tightening. ...

Some pieces of research seemed to support austerity policies. Work by economists Carmen Reinhart and Kenneth Rogoff ... purported to show that countries that borrowed more grew more slowly. ... Subsequent analysis ... showed that there isn’t any evidence that high debt causes low growth.

Another paper on the austerity side ... was a 2002 study by Olivier Blanchard and Roberto Perotti. ... That pro-austerity result contradicts a lot of other papers -- see here and here, for example -- but it was very influential in part because of the prestige of Blanchard...

But in recent years, Blanchard has shifted his stance. In a 2013 paper with Daniel Leigh, he showed that the IMF had been consistently wrong in its forecasts of the effects of austerity. ...

This paper isn’t a one-shot mea culpa. ...

There are still a few pro-austerity papers out there ... but they’re increasingly swimming against the tide of evidence. ...

Monday, June 06, 2016

If the economy goes into recession, Republicans will stand in the way of the needed response from monetary and fiscal policy:

A Pause That Distresses, by Paul Krugman, NY Times: Friday’s employment report was a major disappointment: only 38,000 jobs added, a big step down from the more than 200,000 a month average since January 2013. Special factors, notably the Verizon strike, explain part of the bad news, and in any case job growth is a noisy series... Still, all the evidence points to slowing growth. It’s not a recession, at least not yet, but it is definitely a pause in the economy’s progress. ...

So what is causing the economy to slow? My guess is that the biggest factor is the recent sharp rise in the dollar, which has made U.S. goods less competitive on world markets. The dollar’s rise, in turn, largely reflected misguided talk by the Federal Reserve about the need to raise interest rates. ...

Whatever the cause of a downturn, the economy can recover quickly if policy makers can and do take useful action. ...

But that won’t — in fact, can’t — happen this time. Short-term interest rates, which the Fed more or less controls, are still very low... We now know that it’s possible for rates to go slightly below zero, but there still isn’t much room for a rate cut.

That said, there are other policies that could easily reverse an economic downturn. ... For the simplest, most effective answer to a downturn would be fiscal stimulus...

But unless the coming election delivers Democratic control of the House, which is unlikely, Republicans would almost surely block anything along those lines. Partly, this would reflect ideology... It would also reflect an unwillingness to do anything that might help a Democrat in the White House. ...

If not fiscal stimulus, then what? For much of the past six years the Fed, unable to cut interest rates further, has tried to boost the economy through large-scale purchases of things like long-term government debt and mortgage-backed securities. But it’s unclear how much difference that made — and meanwhile, this policy faced constant attacks and vilification from the right, with claims that it was debasing the dollar and/or illegitimately bailing out a fiscally irresponsible president. We can guess that the Fed will be very reluctant to resume the program...

So the evidence of a U.S. slowdown should worry you. I don’t see anything like the 2008 crisis on the horizon (he says with fingers crossed behind his back), but even a smaller negative shock could turn into very bad news, given our political gridlock.

Friday, May 20, 2016

Helicopter money and fiscal policy: ... We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish between the two can sometime clarify important points (as here from Eric Lonergan) it is ultimately pointless. HM is what it is. Arguments that attempt to use definitions to then conclude that central banks should not do HM because its fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over. ...

At this moment in time, even if a global recession is not about to happen, public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt. ... Indeed there would be a good case for bringing forward public investment even if monetary policy was capable of dealing with the recession on its own, because you would be investing when labour is cheap and interest rates are low. ...

HM is fiscal stimulus without any immediate increase in government borrowing. It therefore avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus. ... HM is not financed by increasing government debt.

Many argue that these concerns about debt are manufactured, and that in reality politicians on the right pushing austerity are using these concerns as a means of achieving a smaller state: what I call here deficit deceit. HM, particularly in its democratic form, calls their bluff. If we can avoid making the recession worse by maintaining public spending, financed in part by creating money while the recession persists, how can they object to that? Politicians who wanted to use deficit deceit will not like it, but that is their problem, not ours.

There is a related point in favour of HM... Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do.

Tuesday, May 17, 2016

A General Theory of Austerity: ...I have just completed a working paper... It has the title of this post: in part an allusion to Keynes who had been here before, but also because its scope is ambitious. The first part of the paper tries to explain why austerity is nearly always unnecessary, and the second part tries to understand why the austerity mistake happened.

I start by making a distinction which helps a great deal. It is between fiscal consolidation, which is a policy decision, and austerity, which is an outcome where that fiscal consolidation leads to an increase in aggregate unemployment. If you understand why monetary policy can normally stop fiscal consolidation leading to austerity, but cannot when interest rates are stuck near zero, then you are a long way to understanding why austerity was a mistake. Fiscal consolidation in 2010 was around 3 years too early. A section of the paper is devoted to showing that the idea that markets prevented such a delay in consolidation is a complete myth. ...

None of this theory is at all new: hence the allusion to Keynes in the title. That makes the question of why policy makers made the mistake all the more pertinent. One set of arguments point to an unfortunate conjunction of events: austerity as an accident if you like. Basically Greece happened at a time when German orthodoxy was dominant. I argue that this explanation cannot play more than a minor role: mainly because it does not explain what happened in the US and UK, but also because it requires us to believe that macroeconomics in Germany is very special and that it had the power to completely dominate policy makers not only in Germany but the rest of the Eurozone.

The set of arguments that I think have more force, and which make up the general theory of the title, reflect political opportunism on the political right which is dominated by a ‘small state’ ideology. It is opportunism because it chose to ignore the (long understood) macroeconomics, and instead appeal to arguments based on equating governments to households, at a time when many households were in the process of reducing debt or saving more. But this explanation raises another question in turn: how was the economics known since Keynes lost to simplistic household analogies. ....

If my analysis is right, it means that we cannot be complacent that when the next liquidity trap recession hits the austerity mistake will not be made again. Indeed it may be even more likely to happen, as austerity has in many cases been successful in reducing the size of the state. My paper does not explore how to avoid future austerity, but it hopefully lays the groundwork for that discussion.

Wednesday, May 04, 2016

Ben Bernanke and Democratic Helicopter Money: “The fact that no responsible government would ever literally drop money from the sky should not prevent us from exploring the logic of Friedman’s thought experiment, which was designed to show—in admittedly extreme terms—why governments should never have to give in to deflation.”

The quote above is from a post by Ben Bernanke... I put it up front because it expresses a macroeconomic truth that no one should ever forget: persistent recessions and deflation are never inevitable, and always represent the failure of policy makers to do the right thing.

There are many useful points in his post, but I just want to talk about one: Bernanke is in fact not talking about helicopter money in its traditional sense, but what I have called elsewhere ‘democratic helicopter money’.

When most people talk about HM, they imagine some scheme whereby the central bank sends ‘everyone’ a cheque in the post, or transmits some money to each individual some other way. It is what economists would call a reverse lump sum tax, or reverse poll tax: the amount you get is independent of your income. That makes it different from a normal tax cut.

In practice the central bank could only really do this with the cooperation of governments. It would not want to take the decision about what 'everyone' means on its own. (Do we include children or not. How do we find everyone?) But once those details had been sorted out, a system would be in place that the central bank could operate whenever it needed to.

Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt.

I have talked about something similar in the past (first here, but later here and here), which I have called democratic helicopter money. This label also seems appropriate for Bernanke’s scheme, because the elected government decides on the form of fiscal expansion. The difference between what I had discussed earlier under this label and Bernanke’s suggestion is that in my scheme the fiscal authorities and the central bank talk to each other before deciding on how much money to create and what it will be spent on (although the initiative always comes from the central bank, and would only happen in a recession where interest rates were at their lower bound). The reason I think talking would be preferable is simply that it helps the central bank decide how much money it needs to create. ...

While democratic HM is not talked about much among economists (Bernanke excepted), I think there are good political economy reasons why it may be the form of HM that is eventually tried. As I have said, conventional HM of the cheque in the post kind almost certainly requires the involvement of government. Once governments realise what is going on, they may naturally think why set up something new when they could decide how the money is spent themselves in a more traditional manner. Democratic HM is essentially a method of doing a money financed fiscal expansion in a world of independent central banks.

Which brings me back to the quote at the head of this post. The straight macroeconomics of most versions of HM is clear: all the discussion is about institutional and distributional details. If it is beyond us to manage to set in place any of them before the next recession that would be a huge indictment of our collective imagination, and is probably a testament to the power of imaginary fears and taboos created in very different circumstances.

The bad news is that eight years after what was supposed to be a temporary financial crisis, economic weakness just goes on and on... And that’s something that should worry everyone, in Europe and beyond. ...

Look at what financial markets are saying.

When long-term interest rates on safe assets are very low, that’s an indication that investors don’t see a strong recovery on the horizon. Well, German five-year bonds currently yield minus 0.3 percent...

How should we think about these incredibly low interest rates? Recently Narayana Kocherlakota ... offered a brilliant analogy. Responding to critics of easy money who denounce low rates as “artificial” ... he suggested that we compare low interest rates to the insulin injections that diabetics must take.

Such injections aren’t part of a normal lifestyle, and may have bad side effects, but they’re necessary to manage the symptoms of a chronic disease.

In the case of Europe, the chronic disease is persistent weakness in spending... The insulin of cheap money helps fight that weakness, even if it doesn’t provide a cure. ...

The thing is, it’s not hard to see what Europe should be doing to help cure its chronic disease. The case for more public spending, especially in Germany — but also in France, which is in much better fiscal shape than its own leaders seem to realize — is overwhelming. ...

But doing the right thing seems to be politically out of the question. Far from showing any willingness to change course, German politicians are sniping constantly at the central bank, the only major European institution that seems to have a clue...

Put it this way: Visiting Europe can make an American feel good about his own country.

Yes, one of our two major parties is poised to nominate a dangerous blowhard for president — but ... the odds are that he won’t actually end up in the White House.

Meanwhile, the overall economic and political situation in America gives ample grounds for hope, which is in very short supply over here.

I’d love to see Europe emerge from its funk. The world needs more vibrant democracies! But at the moment it’s hard to see any positive signs.

Saturday, April 30, 2016

... What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.

Policy improved after that... But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels...

Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted.

Wednesday, April 27, 2016

To some, the idea that the U.S. government isn't issuing enough debt may seem counterintuitive -- after all, federal debt outstanding has more than doubled over the past 10 years. But scarcity is not about supply alone. In the wake of the financial crisis, households and businesses are demanding more safe assets to protect themselves against sudden downturns. Similarly, regulators are requiring banks to hold more safe assets. Market prices tell us that the government needs to produce more safety in order to meet this increased demand.

The scarcity of safety creates hardships... Retirees can’t get adequate returns on their nest eggs. Banks can't earn enough on safe, long-term investments to cover the costs of attracting deposits (interest rates on which can’t fall much below zero). ...

The inadequate provision of safe assets also has profound implications for financial stability. Without enough Treasury bonds to go around, investors “reach for yield” by buying apparently safe securities from the private sector (remember all those triple-A-rated subprime-mortgage investments of the 2000s?). If such behavior becomes widespread, it can create systemic risks that tip the financial system into crisis. ...

No private entity would behave like this. Imagine a corporation with such a safe cash flow and such low borrowing costs. It would issue debt to fund expansions or payouts to its shareholders.

Analogously, the U.S. government should issue more debt, using the proceeds to invest in infrastructure, cut taxes or both. Instead, political forces have imposed artificial constraints on debt -- constraints that punish savers, choke off economic growth and could sow the seeds of the next financial crisis.

Tuesday, April 26, 2016

[The government and OBR] believe that austerity generates growth and so cuts the deficit. The trouble for them is that all the evidence shows that the opposite is true: cuts shrink national income and government spending increases it.

This has attracted cheap abuse from some... Such abuse is wrong, and misses the point. It’s wrong, because - in the context he is writing about – Richard is right to claim that fiscal multipliers are big. There’s widespread agreement (pdf) that multipliers are bigger in recessions (pdf) than in normal times. For example, Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo say (pdf):

The government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds.

The fact that Osborne’s austerity has failed to cut the deficit as much as expected is wholly consistent with this. Bigger multipliers than Osborne assumed meant that austerity depressed output by more than he expected thus making it harder to reduce borrowing.

In this sense, Richard’s critics are plain wrong. However, multipliers aren’t always big. They vary. ... One important factor here is the monetary offset. ... If inflation is around its target, the Bank of England would respond to fiscal expansion by raising rates, resulting in a lower multiplier. This might or might not be a good thing – the appropriate fiscal-monetary policy mix is a legitimate matter of debate – but it would mean that the fiscal multiplier might be disappointingly small. ...

In this sense, advocates of a fiscal expansion after 2020 might be making the same error as advocates of expansionary fiscal contraction in 2010 – they are wrongly assuming that the same fiscal multiplier applies at all times. It doesn’t.

I’m making two points here, one about economics and one about politics. ...

The political point is that Labour supporters should not rely upon a big multiplier as a case for fiscal expansion. And not need they do so. Lots of leftist policies ... can be designed without reliance upon fragile claims about the macroeconomy.

Friday, April 15, 2016

We Are so S---ed. Econ 1-Level Edition: ...And as I am going to tell [my undegraduates] next Monday, real GDP Y will be equal to potential output Y* whenever "the" interest rate r is equal to the Wicksellian neutral rate r*...

If interest rates are low and inflation is not rising it is not because monetary policy is too easy, but because r* is low--and r* can be low because:

consumers are terrified (co low)

investors' animal spirits are depressed (Io low)

foreigners' demand for our exports inadequate (NX low)

or fiscal policy too contractionary (G low)

for the economy's productive potential Y*.

The central bank's task in the long run is to try to do what it can to stabilize psychology and so reduce fluctuations in r*. ...

One way of looking at it is that two things went wrong in 2008-9:

Asset prices collapsed.

And so spending collapsed and unemployment rose.

The collapse in asset prices impoverished the plutocracy. The collapse in spending and the rise in unemployment impoverished the working class. Central banks responded by reducing interest rates. That restored asset prices, so making the plutocracy whole. But while that helped, that did not do enough to restore the working class.

Then the plutocracy had a complaint: although their asset values and their wealth had been restored, the return on their assets and so their incomes had not been. And so they called for austerity: cut government spending so that governments can then cut our taxes and so restore our incomes as well as our wealth.

But, of course, cutting government spending further impoverished the working class, and put still more downward pressure on the Wicksellian neutral interest rate r* consistent with full employment and potential output.

Thursday, March 17, 2016

House Republicans cling to false promise of austerity in their budget resolution: This week, the House Budget Committee reported out, on a party-line vote, their fiscal year 2017 budget resolution. Infighting between House Republicans, centered on the idea that proposed spending cuts should be even more drastic, suggests that this year’s budget resolution is unlikely to pass. However, with all the media attention focused on the House Republican’s inability to come to an agreement, we shouldn’t lose sight of just how austere their budget resolution already is, and how much damage the cuts it calls for would do to the economy over both the short and long run.

For example, the cuts over the first two years would impose a significantly larger fiscal drag on economic recovery than previous Republican budgets. ...

GOP House budget resolutions for the past several years have been obsessed with eliminating the budget deficit by the end of the ten year budget window. This was already a quixotic and damaging goal, and it has become even more so thanks to changes in the CBO’s baseline. And while deficits are created from revenue minus spending, congressional Republicans’ outright refusal to raise any taxes means that spending cuts—and thereby low- and middle- income people—must bear the entire brunt of the budget resolution’s burden. They bear this burden to the tune of $6.5 trillion in spending cuts to vital programs over ten years—programs that overwhelmingly serve those most in need. The cuts would take away affordable health insurance coverage from the millions that have gained it under the Affordable Care Act and then further erode the safety net with cuts to Medicaid, unemployment benefits, and nutrition assistance. Besides making the economic lives of vulnerable populations harder, focusing cuts on this group imposes a large fiscal drag, since these are households that tend to spend (not save) additional dollars of resources back into the economy. ...

In years beyond 2017, the fiscal drag would remain considerable (and would likely damage growth and job creation), but we’re unable to forecast these impacts precisely because the Fed may have regained some scope to (at least partially) offset fiscal cuts in later years. Looking forward, while it is hard to precisely quantify by how much, the deeper budget cuts throughout the ten year window in the House GOP budget resolution would almost surely further hinder and delay a full economic recovery, especially in the near-term.1 ...

1.The cuts in fiscal 2017 of the House GOP budget resolution total $186 billion. We assume a very conservative multiplier of 1.25—Medicaid and SNAP have very high multipliers (between 1.5-2 or even higher), so 1.25 strikes us as quite conservative. This 1.25 multiplier implies that the House budget cuts will place a 1.2 percent drag on a GDP growth in the next year. This loss in GDP means, all else equal, that job-growth in the next year will be 1.4 million less. Putting that in context, job-growth in 2015 was 2.7 million, so the pace of job-growth would be cut by more than half in the coming year. We should note that we are quite confident about this impact for 2017, given that there is little scope or obvious appetite for monetary policymakers to provide enough stimulus with their policy tools to offset this fiscal drag. Cuts totaling $321 billion in fiscal 2018 will also likely drag significantly on growth, but uncertainty about other economic influences on recovery (particularly the response of the Federal Reserve) makes calculating exactly how much hard to quantify.

Wednesday, March 16, 2016

Balanced Budget Amendment “Very Unsound Policy,” Leading Economists Warn: A balanced budget amendment to the Constitution would be “very unsound policy” that would adversely affect the economy, a group of leading economists including four Nobel laureates explain in a letter today to President Obama and Congress, which the Economic Policy Institute and the Center on Budget and Policy Priorities spearheaded. Several constitutional amendments requiring a balanced budget have been introduced in Congress, and the Senate Judiciary Committee is holding a hearing today on the issue.

“A balanced budget amendment would mandate perverse actions in the face of recessions,” the letter notes:

In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise. These built-in stabilizers increase the deficit but limit declines in after-tax income and purchasing power. To keep the budget balanced every year would aggravate recessions.

A balanced budget amendment also would prevent federal borrowing to finance infrastructure, education, research and development, environmental protection, and other vital investments. Adding arbitrary caps on federal spending — which some balanced budget proposals include — would make the amendment even more problematic, the letter says.

China faces the classic policy trilemma of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins.

...[discussion of the costs and benefits of various options] ...

So what to do? An alternative worth exploring is targeted fiscal policy, by which I mean government spending and tax measures aimed specifically at aiding the transition in China’s growth model. (Spending on traditional infrastructure like roads and bridges is not what I have in mind; in the Chinese context, that’s part of the old growth model.) For example, as China observers have noted, the lack of a strong social safety net—the fact that Chinese citizens are mostly on their own when it comes to covering costs of health care, education, and retirement—is an important motivation for China’s extraordinarily high household saving rate. Fiscal policies aimed at increasing income security, such as strengthening the pension system, would help to promote consumer confidence and consumer spending. Likewise, tax cuts or credits could be used to enhance households’ disposable income, and government-financed training and relocation programs could help workers transition from slowing to expanding sectors. Whether subsidies to services industries are appropriate would need to be studied; but certainly, unwinding existing subsidies to heavy industry and state-owned enterprises, together with efforts to promote entrepreneurship and a more-level playing field, would be constructive.

There are recent indications China might be moving this direction. ...

Targeted fiscal action has a lot to recommend it, given China’s trilemma. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country. At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term. Thus, in this way China could effectively pursue both its short-term and longer-term objectives without placing downward pressure on the currency and without new restrictions on capital flows. It’s an approach that China should consider.

Tuesday, March 08, 2016

Simon Wren-Lewis has a follow-up to his recent post on central bank independence:

The 'strong case' critically examined: Perhaps it was too unconventional setting out an argument (against independent central banks, ICBs) that I did not agree with, even though I made it abundantly clear that was what I was doing. It was too much for one blogger, who reacted by deciding that I did agree with the argument, and sent a series of tweets that are best forgotten. But my reason for doing it was also clear enough from the final paragraph. The problem it addresses is real enough, and the problem appears to be linked to the creation of ICBs.

The deficit obsession that governments have shown since 2010 has helped produce a recovery that has been far too slow, even in the US. It would be nice if we could treat that obsession as some kind of aberration, never to be repeated, but unfortunately that looks way too optimistic. The Zero Lower Bound (ZLB) raises an acute problem for what I call the consensus assignment (leaving macroeconomic stabilisation to an independent, inflation targeting central bank), but add in austerity and you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession. I wanted to put that point as strongly as I could. Miles Kimball does something similar here, although without the fiscal policy perspective ...

Skipping ahead (and omitting quite a bit of the argument):

... The basic flaw with my strong argument against ICBs is that the ultimate problem (in terms of not ending recessions quickly) lies with governments. There would be no problem if governments could only wait until the recession was over (and interest rates were safely above the ZLB) before tackling their deficit, but the recession was not over in 2010. Given this failure by governments, it seems odd to then suggest that the solution to this problem is to give governments back some of the power they have lost. Or to put the same point another way, imagine the Republican Congress in charge of US monetary policy.

But if abolishing ICBs is not the answer to the very real problem I set out, does that mean we have to be satisfied with the workarounds? One possibility that a few economists like Miles Kimball have argued for is to effectively abolish paper money as we know it, so central banks can set negative interest rates. Another possibility is that the government (in its saner moments) gives ICBs the power to undertake helicopter money. Both are complete solutions to the ZLB problem rather than workarounds. Both can be accused of endangering the value of money. But note also that both proposals gain strength from the existence of ICBs: governments are highly unlikely to ever have the courage to set negative rates, and ICBs stop the flight times of helicopters being linked to elections.

These are big (important and complex) issues. There should be no taboos that mean certain issues cannot be raised in polite company. I still think blog posts are the best medium we have to discuss these issues, hopefully free from distractions like partisan politics.

Wednesday, March 02, 2016

Four common-sense ideas for economic growth: Let me begin with two facts that I think should be cause for concern. First, since the summer of 2009, the US economy has grown at about 2 percent. Two percent isn't a very good growth rate. Second, the 10-year interest rate at the end of trading today ... was just a bit below 1.8 percent. ...

What’s the way to think about these two facts together? I believe that we are dealing with a situation that goes beyond the usual cyclical issues associated with recession—and for many years the policy debate has been confounded by that. The Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six, and its forecasts are pretty close to the consensus forecasts. The prevailing expectation in markets has always been that significant tightening will take place in nine months. That’s been true for the last six years. It has not happened yet.

If you accept all of this, what should be done? I would suggest four things at a minimum. First, there is an overwhelming case in the United States for expanded public infrastructure investment. ... It’s hard to imagine a better time for expanded infrastructure investment, yet the rate of infrastructure investment is lower now than it’s been anytime since 1947. ...

Second, we should increase support for private investment in infrastructure. ...

Third, we should grow our effective labor force. ...

Fourth, our financial system requires continuing attention. ...

I would say to you that whatever you care about, if all you care about is that we’ve got an excessive federal debt, the most important determinant of the debt-to-GDP ratio in 2030 is how rapidly the economy grows between now and then. If what you care about is American national security, the most important determinant of how much we are respected and how much influence we have in the world is how well our economy performs. If what you care about is inequality and poverty, the most important determinant of the employment prospects of the poor is how rapidly the economy is growing.

I would suggest to you that there is no more important question for the American prospect than accelerating the rate of economic growth. It seems to me, whether you’re a demand sider or a supply sider, a Democrat or a Republican, there’s a great deal of common sense that should lead you to support increased economic growth.

Friday, February 12, 2016

On Economic Stupidity, by Paul Krugman, Commentary, NY Times: ... If you’ve been following the financial news, you know that there’s a lot of market turmoil out there. It’s nothing like 2008, at least so far, but it’s worrisome. ... So how well do we think the various presidential wannabes would deal with those challenges?

Well, on the Republican side, the answer is basically, God help us. ... Leading the charge of the utterly crazy is ... Donald Trump, who ... asserted that Janet Yellen ... hadn’t raised rates “because Obama told her not to.” ... Yet ... Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan ... not only berated Ben Bernanke ... for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”

And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.

On the Democratic side, both contenders talk sensibly about macroeconomic policy... But Mr. Sanders has also attacked the Federal Reserve in a way Mrs. Clinton has not — and that difference illustrates in miniature both the reasons for his appeal and the reasons to be very worried about his approach.

You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. ...

Now, the idea of making the Fed accountable sounds good. But ... such a bill would essentially empower the cranks — the gold-standard-loving, hyperinflation-is-coming types who dominate the modern G.O.P., and have spent the past five or six years trying to bully monetary policy makers into ceasing and desisting from their efforts to prevent economic disaster. Given the economic risks we face, it’s a very good thing that Mr. Sanders’s support wasn’t enough to push the bill over the top.

But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.

It would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations.

So, going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.

The reason that the FOMC has to go negative is because the natural real rate of interest r* (defined to be the real interest rate consistent with the FOMC’s mandated inflation and employment goals) is so low. The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the US government. (Yes, there is already a lot of that debt out there - but its high price is a clear signal that still more should be issued.) The US government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.

But maybe there are no such investments? That’s a tough argument to sustain... With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems. It is choosing not to.

If the government issued more debt and undertook these opportunities, it would push up r*. That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us.

I don't think that Chair Yellen will say the above in her Humphrey-Hawkins testimony tomorrow - but I also think that it would be great if she did.

Monday, February 08, 2016

Wealthy ‘hand-to-mouth’ households: key to understanding the impacts of fiscal stimulus: Many families in Europe and North America have substantial assets in the form of housing and retirement accounts but little in the way of liquid wealth or credit facilities to offset short-term income falls. This research shows that these wealthy ‘hand-to-mouth’ households respond strongly to receiving temporary government transfers such as tax rebates, boosting the economy through their increased consumption. ...

Our research also draws attention to the fact that the aggregate macroeconomic conditions surrounding policy interventions will affect the fraction of the transfer consumed by households in non-trivial ways.

In a mild recession, where earnings drops are small and short-lived, it is not worthwhile for the wealthy hand-to-mouth households to pay the transaction costs of accessing some of their illiquid assets (or to use expensive credit) to smooth their consumption. As a result, liquidity constraints get amplified and their consumption response to the receipt of a fiscal stimulus payment is strong.

Counter-intuitively, the same stimulus policy may have stronger effects in a mild downturn than in a severe recession

Conversely, at the outset of a severe recession that induces a large and long-lasting fall in income, many wealthy hand-to-mouth households will choose to borrow or tap into their illiquid account to create a buffer of liquid assets that can be used to counteract the income loss. Consequently, fewer households are hand-to-mouth when they receive a government windfall. Thus, somewhat counter-intuitively, the effect of the stimulus on consumption can be lower than when the same policy is implemented in a mild downturn.

Acknowledging the existence of wealthy hand-to-mouth households also has implications for economic policy beyond fiscal stimulus. In further work (Kaplan et al, 2015), we show the importance of these households for the efficacy of both conventional monetary policy (changes in nominal interest rates) and unconventional monetary policy (forward guidance about future changes in nominal interest rates).

Wednesday, February 03, 2016

How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s, by Price V. Fishback, NBER Working Paper No. 21925 Issued in January 2016: Abstract The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners’ Loan Corporation’s purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation’s loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.

Monday, January 11, 2016

Overly Tight Macroeconomic Policy: The level of public debt is high by historical standards in many countries. Central banks have set their nominal interest rate targets to extraordinarily low - sometimes negative - levels. Despite these historical comparisons, though, macroeconomic outcomes tell a clear story: Macroeconomic policy remains much too tight in the US and around the world.

In terms of monetary policy, inflation remains low, and is expected to remain low for years. Indeed, financial market participants are betting that most major central banks will fall short of their inflation targets over the next decade or two. Nonetheless, those same central banks (including the Federal Reserve) continue to communicate a strong desire to "normalize" - that is, tighten - monetary policy over the medium term.

In terms of fiscal policy, many governments are able to borrow long-term at unusually low real interest rates. They could invest those funds in needed physical and human infrastructure. Or they could return the funds to their citizens through tax cuts - tax cuts that could be tailored to incentivize physical investment or R&D. But the relevant governments instead continue to emphasize the need to further restrict the level of public debt.

Economic policymakers can do better. The key is to focus a lot more on the question of how to use available policy tools to achieve desirable macroeconomic outcomes, and a lot less on historical empirical regularities. Just because debt is high by historical standards doesn't mean that governments cannot make their citizens better off by issuing more debt Just because nominal interest rates are low by historical standards doesn't mean that central banks can't achieve their objectives more rapidly by lowering them still further.

We are only beginning to see the impact of tight policy choices on our economies. We all know what has been happening in Spanish and Greek labor markets. But even in the US - which supposedly has a near-normal labor market - the fraction of men aged 25-34 who do not have a job is over 50%(!) higher than it was in 2007. Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.

I've said that economic policymakers can do better. Indeed, I increasingly believe that they must do better.

Monday, January 04, 2016

I guess we have to keep making this point, hoping against hope that Congress will hear it. This is from Cecchetti & Schoenholtz:

Falling Interest Rates and Government Investment: Switzerland is an amazing place, not least the skiing, the chocolate, and the punctual trains. The latter is part of the country’s exquisitely maintained infrastructure: there are no potholes, and no deferred maintenance of train tracks, tunnels, airports, or public buildings. Few countries go so far, but many can take a lesson: it pays to maintain infrastructure at least so that it doesn’t fail.

We bring this up now because financial markets are telling us that it’s a very good time to build and repair infrastructure: real (inflation-adjusted) interest rates have fallen so low that it has become exceptionally cheap to finance the improvement and repair of neglected roads, bridges, transport hubs, and public utilities. Yet, in the United States, we are doing less public investment than ever: net government investment has fallen to what is probably a record low. ...

Net Government Investment as a percentage of Net Domestic Product (annual data), 1959-2014

Fixing the problem would be straightforward, and cheap in terms of finance. ...

To be clear, this argument need not be seen as one for a larger government, but for an efficient one that provides the public goods necessary for sustained economic growth at the lowest cost. For a country to remain prosperous, it needs an infrastructure that is constantly being renewed and improved. The alternative of postponing maintenance probably leads to higher costs—both from the direct impact on the economy from the deterioration of physical capital and from the need to finance future (larger) repair projects at potentially higher interest rates. Put differently, when fiscal policymakers choose to tighten the nation’s belt, they should not do so at the expense of future national income. ...

There is no need to be as obsessive as the Swiss; their outlays for public goods are surely greater than most Americans would wish to pay. But given today’s low hurdle rate of return, it is difficult to see how spending an extra 1% of NDP each year now to maintain and improve roads, bridges, airports, and buildings would be economically unsound. Even if the additional outlays are not self-financing, the social return is likely to be far greater than the cost. As monetary economists, we include as a valuable social benefit the reduced probability of hitting the zero lower bound in a world with a 2% inflation target.

Tuesday, December 22, 2015

My views and the Fed’s views on secular stagnation: It has been two years since I resurrected Alvin Hansen’s secular stagnation idea and suggested its relevance to current conditions in the industrial world. Unfortunately experience since that time has tended to confirm the secular stagnation hypothesis. Secular stagnation is a possibility. It is not an inevitability and it can be avoided with strong policy. Unfortunately, the Fed and other policy setters remain committed to traditional paradigms and so are acting in ways that make secular stagnation more likely. ... Indeed I would judge that there is at least a two-thirds chance that we will experience zero or negative rates again in the next five years. ...

I believe its decision to raise rates last week reflected four consequential misjudgments.

First, the Fed assigns a much greater chance that we will reach 2 percent core inflation than is suggested by most available data. ...

Second, the Fed seems to mistakenly regard 2 percent inflation as a ceiling not a target. ...

Third... It is suggested that by raising rates the Fed gives itself room to lower them. ... I would say the argument that the Fed should raise rates so as to have room to lower them is in the category with the argument that I should starve myself in order to have the pleasure of relieving my hunger pangs.

Fourth, the Fed is likely underestimating secular stagnation. It is ... overestimating the neutral rate. ...

Why is the Fed making these mistakes if indeed they are mistakes? It is not because its leaders are not thoughtful or open minded or concerned with growth and employment. Rather I suspect it is because of an excessive commitment to existing models and modes of thought. Usually it takes disaster to shatter orthodoxy. We can all hope that either my worries prove misplaced or the Fed shows itself to be less in the thrall of orthodoxy than it has been of late.

The Fed's job would have been, and will be a lot easier if fiscal policy makers would help. I disagree with Charles Plosser's view on monetary policy, but I have some sympathy for the view that many people have come to expect too much from monetary policy:

... On the monetary policy side central banks have clearly pushed the envelope in an effort to stabilize and then promote real economic growth. The pressure to do so has come from inside and outside the central banks. These actions have raised expectations of what the central bank can do. For the last three or four decades, it has been widely accepted among academics and central bankers that monetary policy is primarily responsible for anchoring inflation and inflation expectations at some low level. In the United States, where the Fed operates under the so-called dual mandate to promote both price stability and maximum employment, monetary policy has also attempted to stabilize economic growth and employment. Yet it has also been widely accepted that monetary policy’s impact on real variables was limited and temporary, thus in the long-run changes in money were neutral for real variables.

The behavior of central banks during the crisis and subsequent recession has turned much of this conventional wisdom on its head. It is not clear that this is wise or prudent. Many have come to fear that without substantial support from monetary policy our economies will slump into stagnation. This would seem to fly in the face of nearly two centuries of economic thinking. ...

If secular stagnation is real, the Fed cannot overcome it by itself. Fiscal policy will have to be part of the solution. (I do think one statement above is wrong, and it gets at the heart of Summer's recent work reviving hysteresis and his statement above about commitment to orthodoxy. When Plosser says "monetary policy’s impact on real variables was limited and temporary, thus in the long-run changes in money were neutral for real variables," he is ignoring recent work by Summers, Blanchard, and Fatas showing that recessions can permanently lower our productive capacity, and it is worse when the recession lasts longer. This means that monetary policy -- and fiscal policy too -- can have a permanent impact on the natural rate of output by helping the economy to recover faster. The faster the recovery, the less the natural rate is lowered. So I agree with Summers that monetary policy needs to take the possibility of secular stagnation into account, I just wish he'd put more emphasis on the essential role of fiscal policy -- something he has certainly done in the past, e.g., "I believe that it is appropriate that we go back to an earlier tradition that has largely passed out of macroeconomics of thinking about fiscal policy as having a major role in economic stabilization.")

Sunday, December 20, 2015

I've never paid much attention to the fiscal theory of the price level:

The FTPL version of the Neo-Fisherian proposition: The Neo-Fisherian doctrine is the idea that a permanent increase in a flat nominal interest rate path will (eventually) raise the inflation rate. It is then suggested that current below target inflation is a consequence of fixing rates at their lower bound, and rates should be raised to increase inflation. David Andolfatto says there are two versions of this doctrine. The first he associates with the work of Stephanie Schmitt-Grohe and Martin Uribe, which I discussed here. He like me is not sold on this interpretation, for I think much the same reason. ... But he favours a different interpretation, based on the Fiscal Theory of the Price Level (FTPL).

Let me first briefly outline my own interpretation of the FTPL. This looks at the possibility of a fiscal regime where there is no attempt to stabilize debt. Government spending and taxes are set independently of the level or sustainability of government debt. The conventional and quite natural response to the possibility of that regime is to say it is unstable. But there is another possibility, which is that monetary policy stabilizes debt. Again a natural response would be to say that such a monetary policy regime is bound to be inconsistent with hitting an inflation target in the long run, but that is incorrect. ...

A constant nominal interest rate policy is normally thought to be indeterminate because the price level is not pinned down, even though the expected level of inflation is. In the FTPL, the price level is pinned down by the need for the government budget to balance at arbitrary and constant levels for taxes and spending. ...

I have a ... serious problem with this FTPL interpretation in the current environment. The belief that people would need to have for the FTPL to be relevant - that the government would not react to higher deficits by reducing government spending or raising taxes - does not seem to be credible, given that austerity is all about them doing exactly this despite being in a recession. As a result, I still find the Neo-Fisherian proposition, with either interpretation, somewhat unrealistic.